11th Circuit defines ‘instrumentality’ under the FCPA

As the first appellate court to consider the reach of the term instrumentality, the 11th Circuit recognized that its opinion would provide much-needed guidance to both corporations and the government.

By Greg Deis, Michael Frisch|June 11, 2014 at 08:00 AM

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In a recent landmark decision, the 11th Circuit became the first federal appeals court to define the term “instrumentality” under the Foreign Corrupt Practices Act (FCPA). The court adopted a two-part test and provided a non-exhaustive list of factors applicable to both prongs of the test, “mindful of the needs of both corporations and the government for ex ante direction about what an instrumentality is.” The decision provides welcome guidance to U.S. companies doing business abroad.

FCPA overview

The FCPA prohibits the bribery of “any foreign official,” defined as “any officer or employee of a foreign government or any department, agency, or instrumentality thereof.” The FCPA does not define “instrumentality.” Since the FCPA’s enactment, the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) have brought enforcement actions involving bribes paid to employees of state-owned or state-controlled enterprises. In the 2012 DOJ/SEC FCPA Resource Guide (available here), the government made clear its view that “[t]he term ‘instrumentality’ is broad and can include state-owned or state-controlled entities.” A review of prior enforcement actions provides numerous examples of the government’s broad definition of instrumentality. For example, the second FCPA case charged by DOJ (in 1982) involved the payment of bribes to two executives of a state-owned Mexican national oil company. More recently, the government has brought several enforcement actions involving bribes paid to doctors at public hospitals.

The 11th Circuit’s Esquenazi decision

In United States v. Esquenazi, the defendants sought to limit the definition of “instrumentality.” The case involved Joel Esquenazi and Carlos Rodriguez, two former executives of Terra Telecommunications Corp., who were found guilty for their roles in a scheme to bribe officials at Haiti’s state-owned telecom company, Haiti Teleco. Mr. Esquenazi received a 15-year sentence — the longest ever imposed under the FCPA. The defendants argued that the term instrumentality should be limited to entities that perform “traditional, core government functions,” and that, therefore, Haiti Teleco did not qualify as an instrumentality of Haiti’s government.

The 11th Circuit disagreed, instead holding that an instrumentality is any entity that is “controlled by the government of a foreign country” and “that performs a function the controlling government treats as its own.” Applying this two-part test, the court noted that what constitutes “control” or “a function the government treats as its own” are fact-based questions. While the court noted that “[i]t would be unwise and likely impossible to exhaustively answer them in the abstract,” it went on to provide a non-exclusive list of “some factors that may be relevant” to deciding those issues.

First, to decide if the government controls an entity, the court offered the following list of factors:

The foreign government’s formal designation of that entity

Whether the government has a majority interest in the entity

The government’s ability to hire and fire the entity’s principals;

How the entity’s profits and losses are managed

The length of time these factors have existed

With respect to the second element — whether the entity “performs a function the government treats as its own” — the court held the inquiry should focus on whether:

The entity has a monopoly over the function it exists to carry out

The government subsidizes the costs associated with the entity providing services

The entity provides services to the public at large in the foreign country

The public and the government of that foreign country generally perceive the entity to be performing a governmental function

Applying those factors, the 11th Circuit held that the evidence was sufficient to support the jury’s conclusion that Haiti Teleco was an instrumentality and affirmed the defendants’ convictions. In reaching this conclusion, the court focused on several facts. First, Haiti had granted Teleco a monopoly over telecommunications service and gave it various tax advantages. Second, Haiti’s national bank owned 97 percent of Teleco. Third, Haiti’s President chose Teleco’s director general and appointed all of its board members. Fourth, the government offered expert testimony that Teleco belonged “totally to the state,” “was considered… a public entity” and “government, officials, everyone consider[ed] Teleco as a public administration.” Based on these facts, the 11th Circuit held that the “evidence was sufficient to show Teleco was controlled by the Haitian government and performed a function Haiti treated as its own, namely, nationalized telecommunication services.”

Implications of the ruling

As the first appellate court to consider the reach of the term “instrumentality,” the 11th Circuit recognized that its opinion would provide much-needed guidance to “both corporations and the government.” Moving forward, on the enforcement side, the second prong of the 11th Circuit’s two-part test — which requires that the entity “perform a function the government treats as its own” — will likely be the focus of continued debate. While the 11th Circuit rejected the defendant’s argument that “instrumentality” should be limited to entities that “perform traditional, core government functions,” the court left room for future defendants to argue that their conduct falls outside the scope of the FCPA. Government ownership, standing alone, will not suffice.

But from a compliance perspective, the key message remains the same. Companies should continue to guard against bribery, both foreign and domestic, regardless of whether the recipient is an employee of the government or a department, agency or instrumentality thereof. As an initial matter, the fact-intensive nature of the inquiry makes it difficult for a company to predict with certainty that an entity would fall outside the definition of instrumentality. While the 11th Circuit’s test provides some guidance, compliance officials would be well advised to err on the side of caution. Further, commercial bribery (i.e., bribery not involving a foreign public official) may still violate the FCPA’s accounting provisions or other U.S. laws, e.g., the Travel Act or anti-money laundering laws. And the UK Bribery Act and other foreign laws prohibit bribery even if the bribe recipient is not a “foreign official” under the FCPA. Thus, while Esquenazi is a landmark decision and provides welcome guidance, it doesn’t change much on the anti-corruption compliance front.

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